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NYAG's challenges non-competes agreements: 2 lessons for businesses

On behalf of of Rich Michaelson Magaliff, LLP posted in Contract Disputes on Wednesday, August 3, 2016.

Noncompete agreements are intended to protect businesses. These agreements are generally crafted to ensure an employee does not take a job with a competitor within the same area as the original employer over a certain period of time. Although these agreements can be beneficial to employers they can also pose risks if not structured wisely. These risks include exposing the business to attacks by the media and, most recently, New York's Attorney General (NYAG).

Agreements that often receive scrutiny are viewed as too broad, forcing employees to stay within unreasonable restrictions after leaving an employer. According to a recent article in JDSupra's Business Advisor, the NYAG is pursuing agreements that fall within this realm, agreements that are so egregious that they could be construed as "unconscionable contract provisions".

What should employers learn from the NYAG's recent actions? In June of 2016, the NYAG required Jimmy John's Gourmet Sandwiches to cease requiring employees to sign these agreements and void all noncompetes that were currently in effect.

This business had to completely cease using the documents. Not amend them, not adjust the provisions, but cease using them entirely.

Other business leaders should take note. The use of noncompete agreements can come with scrutiny. Take the time to review these documents. Look specifically for these two issues:

Who does the noncompete agreement apply to? Does the noncompete agreement focus on lower level employees that have "little to no knowledge of any trade secrets or confidential information"? If so, it will likely come under scrutiny by the NYAG. Businesses can reduce this risk by keeping these agreements tailored to higher level employees that are exposed to confidential information. This will both protect the business's confidential information and reduce the risk of critique by the NYAG.

Is the agreement reasonable? In order for the AG to find success when alleging that an agreement is "unconscionable", the agreement must be seen as "far out of bounds" and unreasonable. Review the document and make sure the restrictions are reasonable to further avoid scrutiny.

Business leaders that use noncompete agreements are wise to take these recent challenges as an opportunity to review their agreements and make changes where necessary.

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